A cyber-resilience blueprint for ASEAN

East Asia Forum - 6 hours 5 min ago

Author: Tim Scully, ANU

ASEAN is at the moment drifting aimlessly in cyberspace. But it could take advantage of its own rapid growth in internet penetration and the harsh cyber-security lessons of other nations, to create an inclusive, coordinated and adaptive ASEAN Cyber-Resilience Blueprint one that could be an international exemplar.

Information technology innovation, particularly on the internet, is possibly the fastest developing phenomenon humans have faced, yet after a generation online there are no effective national, regional or international rules for living and working in cyber-space.

The downside of irrevocable online dependency is the vulnerability to malicious actors and other digital catastrophes. National interests in cyberspace, namely national security and economic prosperity, are at risk.

Unfortunately, discussion of ‘national security’ and cyberspace often gravitates towards government, military and intelligence actors with a remit for cyber operations. Excluded from the discussion, key government, industry and academia stakeholders who create economic wealth are left both vulnerable to cyber threats and unable to contribute their capabilities to the national effort.

The evocative notion that engagement in cyberspace transcends nation states in a borderless world is illusory. In reality, interactions in cyberspace remain within sovereign borders where national laws and regulations still apply.The cyber threat has existed for over a decade, but policymakers have been slow to address it, nationally and internationally. While each nation should continue to contribute to the formulation of international norms, priority should now be given to getting it right at home.

These considerations need to be taken into account when addressing a cyber-resilience blueprint for ASEAN.

ASEAN members would be better served individually and collectively by prioritising national and regional cyber-resilience policy settings and capabilities.

Internet penetration (the percentage of a nation’s population with Internet access) varies widely among ASEAN member nations with Singapore the highest at 73 per cent and Myanmar the lowest on 1.2 per cent. This is a big gap, but the average annual growth in access has been a very fast 10.3 per cent since 2008 (that is, over 60 million people in ASEAN nations gained access to the internet annually).

Rather than being an impediment, the disparity in information and communication technology (ICT) development and internet penetration among ASEAN members presents an important opportunity for ASEAN to develop a template to build a coordinated, common and flexible approach to cyber-resilience.

As ASEAN nations rapidly develop ICT capabilities, they can draw upon the lessons of other nations’ efforts to develop policies and build capability to counter cyber threats. Those with nascent or immature ICT infrastructure can, with other members’ and dialogue partners’ help, build cyber-resilience into their national systems from the outset, including exploiting IPv6 technology, rather than retrofitting them as many other nations have been forced to do because the internet, after all, was not built with security in mind.

Numerous cyber-security or resilience plans are being developed by regional organisations (for example, the European Union, APEC, OSCE, the SCO, the OIC) upon which ASEAN could build, but those organisations’ diversity and unwieldy size makes consensus elusive, which should signal caution to ASEAN. ASEAN’s small size will be an advantage when contemplating a regional approach to cyber-resilience.

While ASEAN should evaluate others’ plans, shoe-horning them into an ASEAN plan should be avoided; assessing cyber-resilience is not a one-size-fits-all exercise. ASEAN members have unique circumstances that must be scrutinised and rationalised as a first step in creating an ASEAN Cyber-Resilience Blueprint.

The blueprint’s second step would entail a comprehensive stocktake of its members’ existing ICT and cyber-security infrastructure and capabilities to identify strengths and weaknesses. It would also test the assumption that existing national government institutions, policymaking apparatus and operational agencies are ‘fit for purpose’ when dealing with the cyber threat.

Importantly, the blueprint would assess the ideological, political, economic, social and cultural factors that would influence the blueprint and subsequent strategic plan.

ASEAN would develop the blueprint using an expansive engagement model that moved beyond the usual government inter-agency and departmental remits to embrace all elements of national leadership and capability including government, industry and academia. It is not a matter that should be left solely to the government or military and intelligence agencies.

So, these relatively late starters have an opportunity to get cyber-resilience policy and implementation right from the outset using an adaptive, ASEAN-developed template. Their ability to do so puts ASEAN in a good position to create an ASEAN cyber-resilience blueprint that could be an international exemplar.

Tim Scully is a PhD candidate at the Strategic and Defence Studies Centre, The Australian National University.

This article summarises the author’s presentation to the ASEAN-Australian-NZ Dialogue on 20 November 2014 addressing the topic ‘Evolution in Cyber Affairs: National Security and International Law’.

Categories: Forum

Should the UK monitor Hong Kong’s governance?

East Asia Forum - 18 hours 5 min ago

Author: Ivy Lee, CSUS

China’s foreign ministry recent barring of a British parliamentary delegation from entering Hong Kong in response to pro-democracy protests has raised significant questions on the UK’s role in Hong Kong.

In response to the Foreign Affairs Committee Chair Sir Richard Ottoway’s claim that the UK has a duty to monitor the progress in the implementation of the 1984 Sino-British Joint Declaration, and the Minister for Hong Kong Affairs Hugo Swire’s affirmation that the UK not only has a ‘legal interest’ but also a ‘moral obligation’ to do so, a delegation of UK parliamentarians had planned to travel to Hong Kong in December. Amid a months-long continuing protest by Hong Kong residents who have called for direct nomination of the next Hong Kong Chief Executive in 2017, China announced the delegation would be barred from entering Hong Kong. China’s foreign ministry spokeswoman Hua Chunying pointed out that Britain no longer has the right of oversight or any moral responsibility toward Hong Kong.

So who is right?

Hong Kong island was ceded to Britain in 1842 at the end of the first Opium War while Kowloon and the New Territories were either perpetually leased after the Second Opium War or, by an 1898 treaty, given in a 99-year lease to UK. With the approaching termination of the lease in July 1997 and the need to reassure foreign investors that Hong Kong’s flourishing free market economy will continue, China and the United Kingdom reached an agreement on Hong Kong’s future set forth in the Joint Declaration.

Under this agreement the UK was to return Hong Kong in its entirety to China in 1997. In turn China promised to govern Hong Kong for 50 years under a ‘One Country, Two Systems’ policy, with ‘Hong Kong people governing Hong Kong’, and given not only ‘a high degree of autonomy’ but the same lifestyle to which they were accustomed under the British.

Nowhere in the Joint Declaration was there any specification that the UK has the duty to monitor conditions in Hong Kong after 1997. Subsequent to the signing of the Declaration, China drafted the Basic Law in accordance with the Declaration’s principles and promulgated it in 1990. The Declaration was fully implemented when the Basic Law became the de facto ‘Constitution’ of Hong Kong in July 1997 and its main purpose of a smooth transfer of sovereignty was achieved. Clearly then the UK’s legal interest in Hong Kong terminated with its implementation.

China has in fact gone much further in the Basic Law in meeting the political aspirations of Hong Kong residents. Article I of Annex I in the Joint Declaration simply states, ‘The chief executive of the Hong Kong Special Administrative Region shall be selected by election or through consultations held locally and be appointed by the Central People’s Government’. Article 45 of the Basic Law further expands political freedom not up till then enjoyed by Hong Kong residents by asserting ‘the ultimate aim is the selection of the Chief Executive by universal suffrage upon nomination by a broadly representative nominating committee in accordance with democratic procedures’. Note that universal suffrage here refers to one person one vote in an election after candidates are nominated.

In 2007 the Standing Committee of the National People’s Congress (NPC) agreed to Hong Kong’s request for universal suffrage in the 2017 election of its next Chief Executive. In August 2014, Beijing announced the framework for the nomination of two to three candidates by a 1200-member Nominating Committee whose members are from different subsectors, presumably broadly representative of Hong Kong society, such as education, retail, banking, social welfare and religion. Millions of Hong Kong residents would then vote to elect their next Chief Executive. From China’s point of view, the framework not only accords with the articles in the Joint Declaration and the Basic Law, but makes universal suffrage a reality only 20 years into Hong Kong’s return to China.

The ensuing protest is misleadingly characterised by the media as a civil disobedience movement. In fact, protestors demand that candidate nomination be open to the general populace for fear of Beijing’s undue influence on the selection process. But direct democracy is rarely practiced in large complex modern societies, and especially not in one newly emerged from colonial rule with few institutions to support it. While no consensus existed initially with regard to what constitutes a democratic nomination process, by now pro-democracy leaders are united in their opposition to the August framework. They accuse Beijing of not meeting their demands for ‘genuine’ universal suffrage, as they believe they could not be nominated in a pro-Beijing Nomination Committee. In effect they demand a change in the Basic Law.

These protestors have the freedom to protest beyond that enjoyed by citizens of western democracies. No city in a western democracy would have stomached a paralysing but continuing two-month-long protest with dwindling support. The Hong Kong government and police has exhibited exemplary tolerance in this respect. And China had not sent in the PLA to quell the ‘umbrella revolution’ as feared.

It is ironic for UK members of parliament to claim their country has a ‘moral obligation’ to oversee the implementation of democracy in Hong Kong. The notion of democracy for Hong Kong simply did not enter UK politicians’ heads until after the country had agreed to return Hong Kong to China. At that point the UK introduced a modicum of democracy, confined to the election of Legislative Council members, into its colony. The governor and the Executive Council were, as always, appointed by London: a wholly undemocratic arrangement.

The UK’s moral fibre is seen at its finest in Annex II of the Joint Declaration. The UK would not even grant ‘right of abode’ or citizenship to Hong Kong civil servants who feared retaliation from China for having served the British Empire faithfully. Did the UK respond with a sense of ‘moral obligation’ then? China is right: on all counts, the United Kingdom has neither the legal interest in nor moral obligation to the implementation of democracy in Hong Kong.

Ivy Lee is Emeritus Professor of Sociology at California State University, Sacramento.

Categories: Forum

ASEAN labouring under outdated migration policies

East Asia Forum - Thu, 12/18/2014 - 16:00

Author: Giovanni Capannelli, ADB

By the end of 2015, the ASEAN Economic Community (AEC) is expected to establish a single market and production base in the region. With an ASEAN overall workforce of more than 300 million people, the AEC will have strong implications in terms of labour migration and human resource development. By promoting efficiency gains and structural transformation, the AEC will shift the demand for labour skills across countries and sectors, based on evolving patterns of comparative advantages. As a result, labour migration is expected to increase, both within the region and with the rest of the world.

Recent estimates suggest that between 2015 and 2025 the AEC would generate some 14 million new jobs, although gains will likely be distributed unevenly across countries and sectors. Proper economic management is required to ensure that the AEC will generate positive externalities, without adding to existing labour market deficits or increasing national and regional inequality. Policies are needed, in particular, to improve the harmonisation of labour regulation in national systems, increase investment in education, and foster exchange programs for students and teachers in the region.

Labour migration across ASEAN countries occurs largely in informal sectors and focuses on low- and medium-skilled employment groups. Labour migration is mostly affected by structural factors such as population ageing, growth in the labour force, and differences in development levels and political stability. These factors have pronounced differences across countries. For example, while intraregional migration flows among ASEAN countries have grown over the years, the region’s relevance as a source or destination for migrant labour varies widely across countries. Most migrant labour from Myanmar, Malaysia, the Lao People’s Democratic Republic, and Cambodia tends to go to other ASEAN countries. Migrant workers from the Philippines and Vietnam prefer to move outside the region. Thailand attracts migrant labour mostly from other ASEAN countries, while more than 80 per cent of workers who migrate to Brunei Darussalam come from outside the region.

The AEC targets the free movement of ‘skilled’ labour across ASEAN member countries. As it does not include provisions for unskilled labour migration, its short-term impact on improving labour conditions will likely be limited. Besides, the AEC will only allow the temporary movement of skilled workers across companies within the region. Permanent workers’ relocation is not yet permitted. Given the still large differences in existing regulations across ASEAN member countries, policies are needed to facilitate the issuance of visas and employment passes for skilled workers engaged in intraregional trade and investment flows. A clear definition of core competencies for occupational skills is also urgently required, especially in services.

Mutual recognition arrangements (MRAs) are in place for eight professional categories: engineers, nurses, surveying service providers, architects, accounting service providers, medical practitioners, dental practitioners, and tourism professionals. While they only affect less than 2 per cent of total ASEAN employment, MRAs are a fundamental tool in promoting regional labour mobility. They help ASEAN citizens acquire the skills and experience to gain certification in their own country and allow them to work in other AEC member countries. However, implementing the MRAs is difficult, as education and testing requirements vary widely across the region. And several jobs — such as teachers, lawyers, or civil servants — are usually meant only for national citizens. Besides, MRA negotiations have only been conducted bilaterally, while the AEC supposes the creation of a region-wide system to promote labour migration.

The ASEAN Secretariat is actively promoting the creation of the ASEAN qualifications reference framework (AQRF) as part of the AEC to facilitate mutual recognition and certification of skills and qualifications region-wide. The Secretariat is expected to follow an incremental approach, starting from the mutual recognition and certification of key occupations, and expanding to all occupations later. The plan is to first establish national qualifications frameworks (NQFs), with the AQRF emerging as a consolidation of national facilities. Individual countries without NQFs can use provisions included in the ASEAN–Australia–New Zealand Free Trade Agreement to help establish them.

Deep domestic structural reforms and closer regional cooperation initiatives such as the AEC are needed for ASEAN countries to further benefit from labour migration and ensure that gains from integration are equally distributed across the region. Robust institutions are also needed to support labour migration flows, improve safety and transparency, and reduce costs. Improving social protection is of utmost importance to offer opportunities for upgrading skills and a decent life for migrant workers. Improving labour market information systems and producing reliable and detailed labour migration data on the size and profile of migrants is another urgent task.

Eventually, ASEAN leaders should expand the AEC beyond skilled labour to include proper management of unskilled labour movement. Creating MRAs for jobs in sectors such as construction, garments, fishing, and plantations could be the next logical step.

Giovanni Capannelli is the Principal Economist of the Central and West Asia Department of the Asian Development Bank.

Categories: Forum

Election reveals the sorry state of Japan’s political opposition

East Asia Forum - Thu, 12/18/2014 - 04:00

Author: Purnendra Jain, University of Adelaide

Last Sunday’s general election in Japan has returned Prime Minister Shinzo Abe’s Liberal Democratic Party (LDP) and its ally, the New Komeito, with a two-thirds majority in the lower house of the Diet. That the LDP would get a majority of seats was expected, as various polls had shown since Abe unexpectedly announced snap elections in November. Now the LDP holds 291 seats and New Komeito 35 in the 475-seat lower house.

But while this landslide victory gives Abe and his team a free hand in pushing their agenda, it does not augur well for the health of a democratic state that must be based on a competitive party system.

Japan was for long characterised as having a ‘dominant party system’ with the LDP in power and other parties in perennial opposition. Although opposition parties never seriously threatened the LDP’s dominant position, they made significant impacts on policy outcomes. This landscape changed in 1993 when the LDP suffered an electoral defeat for the first time since it was formed in 1955. However, the LDP quickly returned to power within a year and maintained its dominance for another 15 years until 2009.

In the 2009 general election the LDP suffered a crushing defeat to the opposition Democratic Party of Japan (DPJ). It was expected that the DPJ would bring a new political culture in which its leaders will lead in policy matters and the long-held influence of bureaucrats on policymaking would diminish. The DPJ also promised a new political culture through its catchy slogan ‘from concrete to people’, symbolising the end of public works-driven special interest politics and a shift towards people-oriented policies.

But very little changed. The enthusiasm for the DPJ soon began to dissipate due to the party’s internal division and lack of policy cohesiveness, resulting in its prime ministers resigning one after another. As a result of its poor policy performance and party disunity, the DPJ was decimated in the 2012 general election. It went from 230 to 57 seats while the LDP won a landslide victory.

Even though the DPJ lost badly in 2012, there emerged a new element in opposition politics in Japan: the so-called ‘third force’. In particular, the Japan Restoration Party (JRP) led jointly by Osaka mayor Toru Hashimoto and former governor of Tokyo Shintaro Ishihara emerged as a major third force. The Japan Future Party (Nippon Mirai no To) was another, established by then Shiga Prefecture governor Yukiko Kada. Her party’s main aim was to phase out nuclear power plants within 10 years and make Japan a nuclear-free country. Furthermore, the former LDP and DPJ heavyweight Ichiro Ozawa merged his People’s Life First Party (Kokumin no Seikatsu ga Daiichi) with the Japan Future Party, and embraced the no-nuclear agenda. Nagoya mayor Takashi Kawamura and high-profile politician Shizuka Kamei, as well as three lower house members of the new Green Wind (Midori no Kaze) also joined Kada’s party.

Because of their highly personal and conservative styles of politics and their differences on policy issues ranging from nuclear power plants to constitutional amendments, Hashimoto and Ishihara parted company early in 2014. A new party called the Japan Innovation Party (JIP) was formed led by Hashimoto with 42 members in the lower house, while Ishihara formed another party: the Party for Future Generations (PFG) with 19 members in the lower house. Ozawa formed yet another party — the People’s Life Party — after he split from the Future Party.

But this third force has lost its momentum through internal division and lack of coherent policy. Almost all of these third force parties have suffered huge electoral setbacks. The PFG, which held 19 seats in the lower house prior to the election, won only two seats. Ozawa’s People’s Life Party also won only two seats including his own in northern Japan.

Among the opposition parties, the Japan Communist Party is a real winner with 21 seats, up from eight seats prior to the election. But the influence of the Communist Party on policy processes is weak and the party does not favour forming a coalition with other opposition parties, since its ideological stance does not match with any of the opposition parties.

It is clear that the LDP will remain in a commanding position for the next four years and Abe is likely to continue as prime minister until 2016, barring unforeseen circumstances.

Opposition and third force political parties need to think long and hard about their policy and electoral strategies if they are to mount a decent opposition to the ruling party. And upcoming contests give Japanese democracy another chance at pluralism: there will be a unified local election in April 2015 and an upper house election in mid-2016. Abe and his party will have one eye on these elections while pursuing their agenda, as heavy losses in any of these elections might put pressure on Abe to resign.

Purnendra Jain is Professor of Asian Studies at the University of Adelaide.


Categories: Forum

Rural China’s economic model limps on

East Asia Forum - Wed, 12/17/2014 - 16:00

Author: Graeme Smith, ANU

‘Benghai’ was changing. Returning to my old office, my home for ten years of fieldwork in rural China, it was clear something was amiss. Gone was the grizzled caretaker, listlessly following his mop around the ground floor of the four-storey building. In his stead was a bank of impossibly cheerful uniformed women in their early twenties. Their smiles could signify only one thing: real estate.

China’s urbanisation drive was there to greet me. The former vista of water buffalos, bamboo, and misted peaks was replaced by a tangle of mud and discarded scaffolding, concealing the shells of several apartment blocks, up to 15 storeys tall. My colleagues, whose building had been sold off by the county government, were soon to be evicted, the office scheduled for demolition before the end of the year. There was consensus that a ten year life was ‘about right’ for a building in modern Anhui.

The county government was stealthily going about its relocation, despite sporadic disapproval at the provincial level. This was partly driven by the need to keep the project rolling for the benefit of the ‘shadow state’ of friends and relatives who supplied the materiel for the relentless cycle of construction and destruction. Improving the propitiousness of the county government building’s fengshui was also believed to help the chances of promotion for future party secretaries to the provincial government.

Already, patterns of status could be discerned. The most impressive edifices belonged to government agencies with the capacity to charge for their services, control resources or personnel, or levy fines. The Sand Management Office, which made a tidy living by shaking down the drivers of the overloaded trucks that carted river sand to build the provincial capital, merited a six-storey building. Just a few kilometres away, the cracked and pitted road to the capital stood as a monument to their failure to do their job. The humble Records Bureau, which stood in its shadow, had several staff members in each room.

On the other side of the lake, there were indications that ‘Benghai’ was moving up the economic food chain. Another real estate development was underway, this time run by a local businessman rather than one of the many entrepreneurs from Zhejiang, with prices breaking through the RMB4000 (US$650) per square metre barrier. A modest two-bedroom flat in an obscure corner of Anhui will set you back $150,000, if you keep the renovations ‘basic’. The developer of this venture, which would also boast a five-star hotel, had started out as a contractor, building the roads and irrigation ditches that had proliferated during the early years of the New Socialist Countryside campaign.

As the Chinese economy has slowed, with structural issues unaddressed, old China hands are foretelling economic and possibly even political disaster. Yet in the counties of ‘middle China’ the informal, private economy — both the local state and local business — is thriving. Informal solutions are being found to problems that the central state is unable, or unwilling, to address.

Notions of ‘predatory’ and ‘developmental’ states are simplistic. In practice, the formal local state is both prey and predator of the informal, or shadow state. When a mid-level official complains that his brother, who owns a computer shop, has to hand out tens of thousands of dollars’ worth of supermarket cards every year to ensure that contracts from the official’s department continue to flow, is there a victim? Moral categorisations make little sense.

Moreover, a large part of the local party apparatus is quietly engaged in enabling local enterprises to get things done, often for their own benefit, either through the revenue from taxes levelled on service industries or from their own indirect involvement in business.

The formal assessment system does encourage overinvestment by local governments in showcase infrastructure projects, but officials are rewarded in a different way for growing their service sector. At the county and township level, local service businesses are intertwined with local government. They are staffed and run by the relatives and friends of local officials who will spend their career working within the boundaries of their home county. In traditional economic thinking, services are more mobile than manufacturers. But in practice, the service sector is off limits to out-of-towners, and the local government struggles to retain footloose manufacturing businesses by offering cheap land, electricity and tax holidays.

Officials in ‘Benghai’ county strive to attract manufacturers because of the spillover benefits that manufacturers deliver to service companies, owned by officials’ friends and relatives. The formal assessment system rewards officials who hit revenue targets. Service businesses help them to achieve this in two main ways. The first is business tax revenue, which, unlike the VAT and enterprise income tax from manufacturers, is not shared with the central government. The second is conveyancing fees, which flow into the ‘extra-budgetary’ revenue stream. As scholars such as Tao Ran and Liu Mingxing have argued, the revenue sacrificed by offering cheap (or free) land to manufacturers can be recovered by restricting the supply of commercial and residential land.

The disparity between cheap industrial land and costly land for real estate development can be readily observed. In contrast to the 15-storey residential block rising behind my old office, parts of the ‘Benghai Eco-Industrial Park’ were sprawling and untended biodiversity hotspots, ideal for amphibians. Yet the absence of shuttered factory doors, and the thriving service economy that surrounded it, suggested that China’s version of rural capitalism wasn’t ready to croak its last.

Dr Graeme Smith is a Research Fellow at the State, Society & Governance in Melanesia Centre at the College of Asia and the Pacific, Australian National University. This is an edited extract of his chapter in A New China-Australia Agenda’. The name of the county referred to in this article has been changed.

Categories: Forum

A ‘beautiful’ Japan in the eye of the media beholder

East Asia Forum - Wed, 12/17/2014 - 04:15

Author: Chris Perkins, University of Edinburgh

The Japanese media has been set alight by the debate on Japan’s use of ‘comfort women’ — a euphemism referring to the women used for sex by the Japanese Army in World War II. The furore began in August when Asahi Shimbun, Japan’s premier liberal newspaper, admitted that a source used in a number of articles it published on comfort women had fabricated his story. That source was Seiji Yoshida, a soldier who claimed to have been involved in the capture of 200 women in South Korea during the war. Yoshida’s testimony had long been questioned, most prominently by the historian Ikuhiko Hata and the right-wing newspaper Sankei Shimbun.

Unsurprisingly, the right-wing press, politicians and commentators have jumped on this opportunity to score points against the Asahi. Critics argue that the paper’s reporting on comfort women has damaged Japan’s international standing. According to the Asahi’s right-of-centre rival, Yomiuri Shimbun, the articles ‘became a basis of misperception of Japan spreading through the world’.

Two events in particular attract the ire of conservatives. The first is the ‘Kono Statement’ of 1993, in which chief cabinet secretary Yohei Kono acknowledged the existence of comfort women, who were recruited at the behest of the Japanese military, and who ‘lived in misery at comfort stations under a coercive atmosphere’. The second is a 1996 report on violence against women compiled by UN special rapporteur Radhika Coomaraswamy, which suggested Japan consider symbolic compensation for former comfort women.

The current Prime Minister Shinzo Abe, a well-known comfort women sceptic, also believes the Asahi articles damaged Japan’s ‘honour around the world’. Indeed, since the Asahi retractions the Abe government has (unsuccessfully) lobbied the UN to change Coomaraswamy’s report. There have also been calls to revise the Kono Statement.

Meanwhile a widespread ultranationalist campaign to boycott the Asahi and bully universities that employ ex-Asahi journalists has been underway. The campaign claimed an important scalp in November with the resignation of the Asahi’s President Tadakazu Kimura. And, after receiving threatening letters and phone calls from ultranationalists, Hokusai Gakuen University have announced they will not renew the contract of a former Asahi journalist who wrote articles on comfort women. Many scholars working in Japan are currently expressing real concerns over academic freedom of speech.

Even before the Asahi retraction, conservative critics have tried to dismiss the comfort women issue. When doing so they tend to make two related arguments.

The first questions whether the Japanese army can be said to have coerced the comfort women. Conservative critics admit that the Japanese army made use of prostitutes from their colonies, but argue that the women were recruited by middlemen, and as such the Japanese army cannot be accused of coercion. But this argument rests on a very narrow understanding of coercion. Even if it is acknowledged that comfort women were recruited by middlemen (and this is not at all clear), it does not change the fact that the recruitment took place within the context of Japanese colonial expansion through Asia. Oral testimony from Japanese soldiers also repudiates these conservative assertions.

Second, critics argue there is a lack of documentary evidence for the existence of comfort women. This point, as Japanese historian Chizuko Ueno has argued, concerns what counts as proper historical evidence. Critics demand documentation that proves that the Japanese army coerced women into prostitution. But despite a government investigation in 1992 turning up a slew of documents showing Japanese involvement in setting up comfort stations and the archival work of historians such as Yoshiaki Yoshimi, critics deny conclusive evidence of coercion exists. There is of course a large body of oral testimony from comfort women themselves, but critics dismiss their evidence as biased or fabricated. Unfortunately, the Asahi retractions only reinforce the view that oral testimonials cannot be trusted.

The debate over comfort women is also symbolic of Japan’s domestic tussle over the interpretation of wartime, and post-war, history.

For some conservatives the comfort women issue is a component of a sustained campaign by the liberal left, and its mouthpiece the Asahi Shimbun, to maintain a ‘masochistic’ vision of Japan’s wartime experience that damages Japan’s sense of national pride. Furthermore, this view of history helps legitimise the post-war constitution and more specifically Article 9, with which Japan renounces the right to use force to settle international disputes. The idea is that if the factual basis for this history can be challenged then Japan can break free from the shadow of the war and become a ‘normal’ nation: able to remember its war dead with pride, feel good about the past, and to project hard power into the world. To use Prime Minister Shinzo Abe’s words, Japan could once again be a beautiful country. But beautiful for whom?

Certainly not for international observers who view this round of factual nit-picking as yet more evidence of Japan’s lack of contrition and inability to embrace fully the norms and values of the international community. Certainly not for victims of Japan’s wartime aggression for whom semantic debates on the exact definition of coercion could not be further divorced from their concrete experience of suffering and abuse. And sadly not for the plurality of voices in Japan’s democracy, for the Japanese who are working hard to foster positive links between Japan and its former colonies, and for those whose good work is damaged by the volume and reach of increasingly shrill right-wing voices.

Chris Perkins is a lecturer in Japanese Studies at the University of Edinburgh.

Categories: Forum

Australia needs to refocus on ASEAN

East Asia Forum - Tue, 12/16/2014 - 16:00

Author: Gareth Evans, ANU

Things just haven’t clicked the way they should have in the Australian–ASEAN relationship. We seem far removed from the time when as Australia’s Foreign Minister I had no counterparts anywhere in the world with whom I felt more close and comfortable. And from when, at one of the Cambodian peace conferences, having stumbled inadvertently into an ASEAN foreign ministers’ coffee meeting, my apologies were waved aside with the words ‘Come on in. You’re one of us.’

These days it seems to me that ASEAN simply doesn’t feature as largely in Australia’s collective consciousness as it should or (Indonesia perhaps excepted) get the policy attention it should; Australian politicians don’t go out of their way to forge personal relationships with regional counterparts as they should; students don’t study the region’s languages anything like as much as they should, and indeed used to; and — compared to other countries — there is a really striking lack of Australian financial investment in the region.

Why is this the case?

It cannot be the diminished size or relevance of ASEAN for the Australian economy or its strategic decision-making. Australia’s two-way trade with the ASEAN bloc, with its 600 million people, is 15 per cent of the total, putting it second only to China, and well ahead of Japan and the US. Australia is the major provider of Western education to a number of countries in the region. Beyond economics, Australia has developed real intimacy in defence and police relations in many parts of the region, and continues to engage in an intense flurry of diplomatic activity. One reason ASEAN occupies less mental space of policymakers may be that there has been some degree of disappointment in the way that ASEAN as an institution has functioned. Another may be that China’s quite explosive rise has forced everyone to change their sense of relative geopolitical priorities.

But ASEAN still matters a lot geo-strategically for Australia. Its very existence – like that of the European Union – has been an extremely effective conflict prevention mechanism in a region whose previous volatility, and propensity for bloody interstate violence, seems to have been forgotten. When it comes to building effective regional security and economic dialogue and policymaking mechanisms, Australian policymakers have seen to their cost that irritation with ASEAN’s insistence on its centrality in these institutions is counterproductive. It may not make much rational sense to have all ten ASEAN states sitting at every major table when three or four would do, but it makes political sense to go with that flow.

This lesson was learned early on in constructing APEC, and working to build the ASEAN Regional Forum. But subsequent Australian Foreign Ministers have had to learn it the hard way. While the East Asia Summit has finally come together, it is still a work in progress. It is a leaders’ forum with the membership and mandate to be a really effective policy engine for the wider region.

Beyond these formal institutional processes, there is perhaps a larger point to be made about how Australian policymakers should be thinking about their Southeast Asian neighbours. In the present evolving and uncertain regional geostrategic environment, Australia might well be wise to be a little less overwhelmingly preoccupied with the United States and China, and to become rather more focused on consolidating our position closer to home. This means developing stronger, closer and more multidimensional relationships with ASEAN and its key member countries.

The argument is essentially that Australia would be more comfortably placed to navigate a course between its superpower military ally and its emerging-superpower major economic partner if it had a stronger identity as a strategic and economic partner with South East Asian neighbours. Australia could, once and for all, shrug off the lingering perception around Asia that it is playing ‘deputy sheriff’ to the United States. This is the kind of role that Australia was building with ASEAN — and especially Indonesia — during the Hawke-Keating governments. But it diminished during the Howard years and Australia has not recovered that ground since.

Any significant move to consolidate and strengthen institutional and personal ties with Southeast Asia — and to make this a clearer and stronger element in the overall foreign policy narrative — need not and should not come at the expense of Australia’s established relationships with the United States and China, and with Japan and South Korea, or even of neglecting the need to rapidly further develop our relationship with India.

It is a matter simply of recognising that nothing is static in the world; that all of us need as many close friendships as we can; and that for Australia there is much to be gained, and nothing to be lost, by making much more of the friendships it already has with its immediate northern neighbours.

There are many areas in which Australia could directly benefit from closer cooperation. These include not only the familiar area of education but also counter-terrorism, civil nuclear energy, agri-food, Islamic banking and forced migration.

Out of all the areas of current and future concern that would benefit from a generally more engaged relationship, forced migration is most in need of rapid advancement. No Australian political party — in or out of government, or sitting on the cross-benches — has conducted itself with any glory in the handling of the asylum seeker issue in recent years.

One of the least glorious chapters of all has been the utter inability of our policymakers to bring to fruition the arrangements contemplated by the Bali Process, which looked for a time so promising, and put in place once and for all an effective regional processing system. But Australia is not going to get there without a rather fundamental recalibration of its attitudes and behaviour towards ASEAN neighbours.

ASEAN matters a lot and it should get more systematically focused attention from both Australia’s business community and foreign policymakers.

Gareth Evans is Chancellor of the Australian National University, Co-Chair of the Global Centre for the Responsibility to Protect and served as Australia’s Foreign Minister from 1988–1996. This article was adapted from a speech for the launch of Sally Percival Wood and Baogang He (eds) The Australia–ASEAN dialogue: Tracing forty years of partnership (Palgrave Macmillan, 2014).

Categories: Forum

The reign or reining in of Chinese monopolies

East Asia Forum - Tue, 12/16/2014 - 04:00

Author: Patrick Williams, ANU and PKU

Surprise raids by Chinese government officials on the offices of major multinationals in China to catch out monopolistic business activity have created perceptions of bias against foreign firms in the enforcement of the anti-monopoly law.

Bias or not, what the raids and the reaction demonstrate are the conflicting objectives that surround the next steps in China’s economic reforms. On the one hand, policy seeks to shake out entrenched vested interests around state-owned and protected monopolies. On the other, it seeks to protect and strengthen the still significant role of state-owned enterprises in the economy.

The highly publicised raids form part of what Chinese officials have called an ‘anti-monopoly campaign’. State media says thousands of firms have been scrutinised, including Chinese, Japanese, and Western firms. Tens of millions of dollars have already been paid by companies that have been judged to be engaging in unfair monopolistic pricing. Other businesses have simply dropped their product prices in an attempt to deflect being investigated.

A firm will charge a higher price for its products if it faces no competition, extracting monopoly profits at the expense of consumers. Diminished competition may be the result of a number of things. Regulators can restrict competition in some markets creating monopoly rents, or firms themselves might drive competitors out of business through predatory pricing or create monopoly power by differentiating their products from substitutes through branding.

In any market economy competition should be promoted — or at least anti-competitive behaviour should be prevented with anti-monopoly or competition law. The focus of competition law needs to be on tackling anti-competitive behaviour by large firms that already possess market power, cartels and anti-competitive mergers. Creating and implementing China’s anti-monopoly law is thus a crucial step in China’s commitment to the welfare-enhancing function of a market economy.

Chinese consumers are frustrated at the high costs of some foreign products. The higher cost of a Mercedez-Benz or a Starbucks coffee in China (both substitutable for a Chinese Hongqi limo or a New Island latte) is not necessarily evidence of monopolistic pricing, but more likely the result of the premium that Chinese consumers are willing to pay for these brands and the quality they guarantee.

A bigger problem than overpriced frappuccinos is that focusing public attention on expensive foreign goods deflects attention from the more complicated issue of untangling home-grown monopolies. China’s economy today continues to be characterised by monopolistic structures protected more because of politics than economics. These entities impede economic growth and put consumer welfare a poor second.

The story of China’s path towards its contemporary ’socialist market economy’ can only be understood as a story about monopolies, and the gradual de-monopolisation of Chinese industries from their origins in the formerly centrally planned economy.

Under central planning, industrial production was monopolised by the state. Competition between firms did not exist. Their production and markets were set by quotas allocated by planners, such that industrial profits were high. After China’s economic reforms in 1978, some competition between firms was allowed, and barriers to entry into industrial production were removed. Township and village enterprises, followed by private enterprises, entered into high-profit industrial production and quickly reduced prices and state profits through competition in the market. The activity of small and medium sized firms has since continued to flourish, and as Nick Lardy recently pointed out, it is these private firms that make the biggest contribution to China’s economic growth, rather than the many large SOEs.

Many of China’s SOEs were privatised in the 1990s as they became loss-making in the face of new more efficient competitors. Those that survived privatisation were necessarily more profitable, largely because they remained monopolistic business structures to varying degrees, whose monopolies were entrenched by the state. They remain protected against private and foreign competition, for example through restrictions on entry, in the form of easier access to cheap credit from state banks, or through exclusive access to lucrative government construction or service contracts. The World Bank calls these ‘administrative monopolies’ the number one problem facing private enterprise in China today.

Ideology and politics make privatisation of these giant SOEs unlikely for some time yet. And ideology aside, there is a strong and understandable desire at many levels of society to build up the competitive power of Chinese businesses, including SOEs, as ’national champions’. The risk is that the state’s reflex to protect Chinese firms by selectively enforcing the anti-monopoly law, like an over-protective parent, might suffocate their capacity to step up and compete with the world’s leading firms in technology, innovation, and quality, domestically and abroad.

Chinese regulators will need to fully and rigorously enforce the anti-monopoly law across the full spectrum of firms operating in China’s markets, foreign, private and state-owned alike if Chinese firms are to grow strong and competitive at the same time.

Patrick Williams is a visitor at Peking University as an Endeavour Award Postgraduate Scholar and graduate student at The Australian National University.

Categories: Forum

What are Myanmar’s Buddhist Sunday schools teaching?

East Asia Forum - Mon, 12/15/2014 - 16:00

Author: Matthew J Walton, University of Oxford

A Buddhist monk sits in front of a classroom of children in a small town in rural Myanmar. He chants lines which the students dutifully repeat, as they do every week at these Buddhist ‘Sunday school’ classes. The monk teaches Buddhist values, regales students with stories of the Buddha’s previous lives, and talks about Myanmar’s history as a Buddhist nation.

How should we interpret this scene? Is it simply an innocent example of imparting religious values to the next generation or another worrying indication of the insidious spread of anti-Muslim nationalism in Myanmar? Frustratingly, the answer might be both, which makes it difficult to know how to respond or intervene. In periods of rapid transition and modernisation, people develop an intensified concern regarding the loss of their cultural identity and traditions. These anxieties were present in colonial Burma in the first decades of the twentieth century and galvanised the nationalist movement at the time; they are also pervasive in contemporary Myanmar.

The outside world has focused almost exclusively on the admittedly worrying anti-Muslim orientation of the Buddhist nationalist movement in Myanmar, but another emerging aspect of contemporary Buddhist practice in Myanmar demonstrates that the relationship between religion and nationalism is complex and must be analysed carefully. Since about 2010, different organisations have been creating networks of Buddhist Sunday schools in an attempt to instill Buddhist values in children, who, they are worried, will not grow up with the same religious understanding or devotion of previous generations.

The rapid expansion of these classes has seen some organisations teaching tens of thousands of students in hundreds of locations across the country. Where they are centrally organised, the level of top-down control varies. MaBaTha (the Organisation for the Protection of Race and Religion, that has been promoting a series of discriminatory laws connected to religion) merely sells a curriculum book and invites interested lay people to develop their own classes. At the other end of the spectrum, a group called the Dhamma School Foundation has a much greater level of organisation, with a detailed teacher training curriculum, the involvement of monks in teaching, and regular evaluations including site visits. Nowhere do these classes supplant the public education that children receive, but, as might be expected in a Buddhist majority country, the line between the two is not always clear.

Some might be concerned that these informal schools will simply be vehicles to inculcate children in an increasingly virulent anti-Muslim nationalism. But the curricula for most are relatively innocuous, teaching exactly the kinds of values one would want to promote among Buddhists in Myanmar.

Does this mean we can champion these schools as an effective response to religious conflict in the country? Unfortunately, the answer is probably no, at least not until there also develops an alternative understanding of the appropriate ways to promote and protect Buddhism.

The dominant framework within which most Buddhists in Myanmar at the moment are interpreting the notion of protecting their religion is against the external threat of Islam. Teaching materials themselves may not be problematic but when they are used by monks who also spread misinformed rumours and negative images of Muslims, the message children get is not that Buddhist values should be promoted to make Myanmar a more peaceful country but that Buddhist identity is under threat and must be secured against an outside enemy. More worryingly, even when these classes are not linked to explicit anti-Muslim rhetoric, students and teachers are likely to interpret their lessons within the context of the currently dominant narrative of Buddhism in Myanmar in danger of being overwhelmed by Islam.

Well-intentioned but incautious outside voices seeking to address Myanmar’s religious conflict have at times exacerbated tensions. For example, the Time magazine article about hardline Buddhist monk U Wirathu merely resulted in a circling of the wagons. A critique of one monk’s reprehensible preaching was interpreted as an attack on Buddhism writ large.

Buddhist Sunday Schools are part of a (in many ways laudable) response by Burmese Buddhists to the anxieties they are facing regarding the opening up of their country to outside influences. Some even emphasise the kinds of inclusive and tolerant practices that will be a necessary foundation of a religiously plural Myanmar. Criticising or dismissing them as simply vehicles for the spread of religious bigotry would be counterproductive, alienating many Buddhists whose main engagement with a group like MaBaTha might be in its pro-Buddhist guise rather than its anti-Muslim orientation. But one aspect cannot be easily separated from the other.

It will be necessary to clearly communicate to Burmese Buddhists that, while their attempts to promote the best values of their religion are admirable, unless the narrative that posits Buddhism as under threat from Islam is altered, there is a danger that their efforts could actually encourage an ignorant and violent intolerance that is the very opposite of what the Buddha taught.

Matthew J Walton is the Aung San Suu Kyi Senior Research Fellow in Modern Burmese Studies at St Antony’s College, University of Oxford.

Categories: Forum

The politics of Japan’s new aid charter

East Asia Forum - Mon, 12/15/2014 - 04:00

Author: Purnendra Jain, University of Adelaide

2014 marks the 60th anniversary of Japan’s foreign aid program. The nation was still receiving World Bank aid when Tokyo began a modest foreign aid program through joining the Colombo Plan in 1954. Today, as one of the world’s largest donors, Japan is placing an increasingly explicit emphasis on foreign aid for the national interest.

The 60th anniversary provides a useful opportunity for reflection and renewal and to chart a course for the next decade. To this end, the Japan International Cooperation Agency Research Institute (JICA-RI) has formed a group of domestic and international researchers and practitioners to reflect on Japan’s aid record up to now and to suggest directions for the post-2015 development agenda.

Japan’s Official Development Assistance (ODA) program has undergone significant transformations, in its scale, programs and objectives, and in its geographical reach and domestic policy players.

Aid has and will continue to be a key diplomatic tool in Tokyo’s foreign policy kit. From initially modest contributions, Japan’s aid budget grew through its ‘economic miracle’. By the late 1980s Japan emerged as the world’s largest aid donor: a position it held for roughly a decade. Following its prolonged economic downturn, Japan has slipped to fifth on the OECD donor table, but, with an annual budget of US$10 billion, it remains a significant donor internationally. It is likely to remain so for many years to come.

Japan’s bilateral aid, focused largely on Asia for at least three decades, is now far more geographically diversified. Africa, Latin America and the South Pacific are now all on its radar. Asia itself is much more prosperous than even a decade ago. Countries like South Korea and China that once received large amounts of aid from Japan have graduated from recipient status. As significant donors themselves, they draw from their experience of Japan as their major donor.

Japan’s contribution to Asia’s development story through its aid program cannot be understated. Waste and corruption associated with some country-specific aid programs in the region have largely been corrected thanks to critical and constructive responses from academics, civil society, non-government groups and the media, at home and abroad.

But Japan’s foreign aid program was for a long time been essentially devoid of a guiding philosophy. Aid policies were made largely inside the Japanese bureaucracy, with dozen of ministries and agencies involved, each pursuing its own narrow, sectional interests rather than being informed by clear policy objectives. What foreign aid was actually to achieve — and for whom — was not clearly articulated.

Today the long-standing administrative landscape of multiple aid-related ministries remains largely intact. But some key reforms at the institutional and policy level have been undertaken in recent years. To streamline the yen loan program, for example, the Overseas Economic Cooperation Fund (OECF) was merged with the EXIM Bank of Japan in 1999 to become the Japan Bank for International Cooperation (JBIC). Nine years later in 2008, as a result of reforms of Japanese state-owned banking institutions, JBIC’s yen loan and grant aid sections were amalgamated with the New JICA. The New JICA, as it is known, was created in 2008 to bring together the three key aid programs — grant aid, yen loans and technical cooperation — within a single aid institution.

The agency is now the world’s largest for bilateral aid programs and is no longer headed by a foreign affairs official. From 2003–2012 JICA was headed by the high-profile academic, UN diplomat and respected administrator Sadako Ogata. Since 2013 it has been the distinguished international relations scholar from Tokyo University, Professor Akihiko Tanaka.

In response to criticism that its aid program lacked a philosophy, Tokyo finally issued an ODA charter in 1992. This was revised in 2003. The Charter outlined purposes and principles, but implementation of those principles was uneven. Japan has increasingly used ODA as a political instrument to serve Japan’s diplomatic and strategic interests, including support for its key ally, the United States.

But as the geo-strategic landscape has evolved, Japan’s economy has stagnated. This year the Abe Government established a committee to review the 2003 charter and make recommendations for a revision that reflects appropriate responses to changing domestic and regional circumstances.

The gist of the current draft charter (circulating in policy circles but not yet in the public arena) is that while retaining some traditional policy objectives of economic development — protection of the natural environment, human rights and so forth — the aid budget will also be directed towards areas of ‘security’ and ‘defence’ to serve Japan’s national interest.

Never before has Japan’s ODA charter (ODA taiko) emphasised national interest, security, defence and pursuit of active pacifism. In fact, the title of this charter has abandoned the term ODA altogether. Instead it presents a Development Cooperation Charter (kaihatsu kyoryoku taiko) that reaches beyond ‘development’ into the ‘security’ arena, including indirect military assistance to maintain global peace and security and manage natural disasters.

Explicit use of foreign aid to serve national security will raise some eyebrows within Japan, but it will raise many more externally. In China this new development is likely to be seen as a strategic move to curb China’s rising influence and military assertiveness in the region. Development assistance for ‘peace’ and ‘security’ gives a new meaning to ODA in the new charter.

The content of the new draft Charter puts paid to the criticism that Japanese political leaders take little interest in foreign aid policy since it is made by bureaucrats and not likely to win votes. Drafted with one eye on the political agenda of the Abe government, the new charter moves ODA firmly into the arena of domestic politics. This influence will have international geopolitical ramifications.

Purnendra Jain is Professor of Asian Studies at the University of Adelaide.

Categories: Forum

The arithmetic of Asia’s future growth

East Asia Forum - Sun, 12/14/2014 - 18:00

Author: Peter Drysdale, East Asia Forum

While predicting the future of anything is a loser’s game, we do it automatically whether we know it or not. In our individual, social and our economic pursuits we routinely shape our thinking and behaviour on assumptions about how things might pan out tomorrow, next year or even a decade out.

Much of the stuff we carry around in our heads about the future is individual, inconsequential and even if it involves matters of life and death, won’t matter to our collective fortunes. On other stuff, we’d be wise to test our assumptions and our hypotheses about what the future might look like more carefully. Thinking about the prospects of the Asian economies is an exercise that demands special rigour at this point in human history, because Asia’s remarkable growth — especially, over the past three decades, that of China — has already had profound impact on the shape of the world we live in and with which we have to deal day by day.

Larry Summers and his colleague Lant Pritchett, at Harvard University, in their recent paper entitled ‘Asiaphoria meets regression to the mean’ question what they call the consensus that Asia’s giants, China and India, will continue to grow and shift the gravity of the global economy towards Asia. They argue that there are substantial reasons why China and India may grow much less rapidly than is currently anticipated. They use some straightforward regression analysis to suggest that China’s and India’s recent decades of much higher than average world growth will more likely come to an abrupt end and revert to the global mean 2 per cent growth rate around which other countries, especially in the advanced world, have settled. The history of countries enjoying rapid growth, Summers and Pritchett argue, is that they return to the global average rate, usually very suddenly. Countries with authoritarian governments, they suggest, have the greatest chance of dropping off the growth cliff. ‘Regression to the mean is the single most robust finding of the growth literature and the typical degrees of regression to the mean imply substantial slowdowns in China and India relative even to the currently more cautious and less bullish forecasts’, say Summers and Pritchett.

The Summers and Pritchett paper doesn’t explain why there will likely be a sudden collapse in Asia’s growth although there are some reasonable hints. They simply observe, with impeccable arithmetic, that past income shares and past national growth rates are a poor guide to the future: ‘Many of the great economic forecasting errors of the past half century came from excessive extrapolation of performance in the recent past and treating a country’s growth rate as a permanent characteristic rather than a transient condition.’

The Summers and Pritchett arithmetic analysis of developing country growth performance suggests that it is distinguished by discontinuous drop-offs in growth. These discontinuities, they say, account for a large fraction of the variation in economic growth over the years. China, they declare, is ripe for a fall because of endemic corruption along with high measures of authoritarian rule and a discontinuous decline in Chinese growth is even more likely than general experience would suggest. China’s growth record in the past 35 years has been remarkable — and although nothing in Summers and Pritchett’s analysis, they insist, should be taken to suggest that a sharp slowdown is inevitable — their warning to forecasters and policymakers is clear. In looking at China we would ‘do well to contemplate a much wider range of outcomes than are typically considered’.

Summers and Pritchett are rather more careful than to suggest that analysts who see China and India continuing for some time to have a decisive impact on global economic outcomes simply project past growth rates into the future, though those that broadcast their headline results are not. For example, the Australian Treasury’s work on this issue does not naively project past growth rates forward and to suggest otherwise is professionally negligent.

Summers and Pritchett are less careful in their theorising about what has driven the remarkable changes in these countries’ growth and how the challenges of its next and, by professional consensus, slower phase might be managed. For a start — contrary to their implied claim — private, not state firms have been the foundation of Chinese growth.

There were major social revolutions when Chinese institutions moved decisively towards a market economy on a continental scale from the late-1970s and India began a similar though more limited liberalisation in the 1990s. The Summers and Pritchett time series arithmetic will miss entirely structural breaks like these.

As Paul Hubbard points out in this week’s lead ‘China’s was no simple Thatcher or Reagan-style deregulation. The Chinese rediscovered private property rights, reinvented private enterprise and re-opened to foreign trade for the purpose of catching up to modern science and technology. Using a simple mean reversion forecasting technique back in the 1970s would have completely missed this. And it misses the potential for continued — albeit slower — catch-up growth today’.

Hubbard plausibly suggests that the rise of Asia might be better conceived as the re-emergence of a world in which population size and economic size are closely linked. ‘First in Europe, then in North America, new technology and forms of energy severed this link, leading to radical inequality in the wealth of nations. So today, the United States produces 16 per cent of world output with just 4 per cent of world population. China also produces 16 per cent of world output, but with 20 per cent of world population’.

And, he concludes with some justification, expecting this to be its natural resting place — in a world where everyone grows at global trend — might be more a symptom of Asiaphobia than getting one’s sums right.

Peter Drysdale is Editor of the East Asia Forum.

Categories: Forum

Asiaphoria or Asiaphobia?

East Asia Forum - Sun, 12/14/2014 - 04:00

Author: Paul Hubbard, ANU

Those in the business of long-run GDP projections expect Asia, and particularly China, to keep growing above world trend rates for some years. The most optimistic — such as former Chief Economist at the World Bank, Justin Lin — have China growing at 8 per cent for at least the next decade. The semi-official China 2030 report projects 7 per cent growth later this decade, falling to between 6–5 per cent by 2030. The Australia in the Asian Century White Paper projected Chinese economic growth of 7 per cent and Indian growth of 6.75 per cent until 2025.

But ‘the view that the global economy will increasingly be shaped and lifted by the trajectory of the giants’ has recently been diagnosed by Larry Summers and Lant Pritchett as ‘Asiaphoria’. Their careful study tells us that such ‘abnormally rapid growth is rarely persistent. … Indeed regression to the mean is the empirically most salient feature of economic growth’. Emerging countries in particular tend to have super-rapid but short-lived growth rates, followed by periods of deceleration back to the world average. They argue rapid growth in China and India ‘will slow substantially, … Mainly because that is what rapid growth does’.

For the last 30 years around a quarter of the world’s population has lived in countries with what Summers and Pritchett call a ‘super-rapid growth rate’ above 6 per cent a year. This growth has been unusually consistent through time. While Chinese and Indian growth has been slightly more volatile than that of the US over the period 1980 to 2014, it’s cushioned by a much higher trend. In that period, there were five years in which US real GDP declined. Despite Tiananmen, the Asian Financial Crisis and the ‘sharp discontinuities’ of the Global Financial Crisis (GFC) and the euro crisis, China hasn’t experienced a single negative year in that period. Nor has India.

So why do two Harvard professors conclude that the lived experience of the world’s most populous nations was such a freak event?

Summers and Pritchett use the example of Denmark to show that a 94 year growth forecast based solely on long-term trends isn’t far off. But Denmark was already an advanced country in 1910, with a per capita income that was higher than the average for Western Europe, and three quarters of that of the United States. Ninety four years later it reached 80 per cent of US income levels. That it was already a small, rich country in 1910 makes it a red herring for drawing inferences for the Asian giants.

Time series regressions miss structural breaks. This certainly happened when Chinese institutions moved decisively towards a market economy on a continental scale from the late-1970s. India began to (partially) liberalise in the 1990s.

China’s was no simple Thatcher or Reagan-style deregulation. The Chinese rediscovered private property rights, reinvented private enterprise and re-opened to foreign trade for the purpose of catching up to modern science and technology. Using a simple mean reversion forecasting technique back in the 1970s would have completely missed this. And it misses the potential for continued — albeit slower — catch-up growth today.

It’s easy for modern visitors to forget just how poor China was. According to Angus Maddison’s historical GDP estimates, per capita GDP of the United States in 1820 was higher than China’s in 1978. Thirty years later, per capita income in China has caught up to where the US was just before the Great Depression. Based on the quality of its current institutions, China could converge to two-thirds of US productivity levels — richer, but still three decades behind the US frontier. Visitors on the maglev to Shanghai may not see this, but those on the overnight bus to rural Anhui realise there’s still a long way to go.

The long-term trend isn’t a guarantee against policy missteps or market shocks. Like the US before the Great Depression, China faces large economic and financial risks. Summers and Pritchett give us a timely reminder of these. In particular, how the politics of an economic shock might play out is the biggest wildcard in forecasting China’s growth. But on fundamentals, long-run Chinese growth won’t settle at 2–3 per cent any time soon.

The Chinese leadership takes history seriously in a way that is difficult to conceive for younger countries like Australia or the United States. The last century was the first time that United States has been a superpower. For China, not being a superpower is the historical irregularity.

In fact, the rise of Asia might be better conceived as the re-emergence of a world in which population size and economic size are closely linked. First in Europe, then in North America, new technology and forms of energy severed this link, leading to radical inequality in the wealth of nations. So today, the United States produces 16 per cent of world output with just 4 per cent of world population.

The global diffusion of technology, and institutions, has given poor but populous countries an opportunity to catch up. China also produces 16 per cent of world output, but with 20 per cent of world population. Expecting this to be its natural resting place — the consequence of everyone growing at global trend — might be a symptom of Asiaphobia.

Paul Hubbard is a doctoral candidate at the Crawford School of Public Policy, The Australian National University. He is currently on leave from the Australian Treasury as a Sir Roland Wilson Scholar, and is a former Fulbright Scholar in international relations. The views in this paper do not reflect those of the Australian Treasury.

Categories: Forum

Reviving the call for a global financial transaction tax

East Asia Forum - Sat, 12/13/2014 - 04:00

Author: Kavaljit Singh, Madhyam

The Brisbane G20 Summit offered civil society groups an opportunity to renew demands for a financial transaction tax (FTT). But in the end it proved a missed opportunity to build international cooperation on financial reform.

The global financial transaction tax (FTT) was first tabled at the Cannes Summit in 2011 due to persistent campaigning by a range of international civil society groups. The 2010 Interim Report of the G20 on Fair and Substantial Contribution by the Financial Sector had proposed a flat rate levy on all financial institutions and a ‘financial activities tax’ on profits and remuneration in order to pay for future financial clean-ups and reduce systemic risk. But the proposal was diluted in Busan later that year. That summit called for implementation of the levy taking into account individual country’s circumstances and options.

Despite strong resistance to an FTT by many G20 member-countries, civil society groups should not retreat from this key demand. Rather renewed efforts and mass campaigns should be launched in each member-country of G20 to influence political leaders to accept this demand.

Contrary to popular perception, financial transaction taxes are not new. Many G20 countries had experimented with a wide range of transaction taxes in the past and some countries continue to levy such taxes today.

India, for instance, introduced a Securities Transaction Tax (STT) on equity market trading a decade ago. The STT has undergone modifications in tune with the market developments but it is still being levied on listed securities on stock exchanges and in units of mutual funds. In 2013, India also introduced a Commodity Transaction Tax of 0.01 per cent on commodity futures contracts — including gold, copper and oil — traded in Indian markets.

The policy objectives for a FTT are two-fold: to raise revenue and to restore stability and integrity in the financial markets. According to estimates made by Bill Gates in a report to the G20 on new sources of finance for development, a tax on financial transactions could generate about US$50 billion from G20 member countries. Some other estimates claim that a global financial transaction tax could generate as much as US$250 billion if a wide range of transactions are included. Revenues raised through FTT could be utilised to support programs to fight hunger and poverty and pay for climate mitigation and adaptation costs.

Apart from revenue potential, there are several other justifications for the adoption of a global transaction tax. Such a tax could facilitate the monitoring of international financial flows by providing a centralised database. This could be particularly valuable to developing countries where large information gaps exist.

Unlike many other services, no value-added tax (VAT) is imposed on financial transactions in many jurisdictions. By taxing diverse financial transactions, a strong message would be conveyed that private banks and financiers must share the costs of the global financial crisis.

Given that the majority of transactions made by speculators and high frequency traders are short-term and speculative, an FTT could curb speculative tendencies that induce excessive volatility and fragility in the financial markets. A small tax is unlikely to discourage long-term investors such as pension funds. There is little evidence that an FTT would trigger a liquidity squeeze in financial markets. Avinash Persaud has argued that since high-frequency trading is pro-cyclical, a transaction tax that limited such trading ‘may even provide a bonus in improving systemic resilience’.

Much of the criticism of the FTT focuses on its practicality and technical feasibility. It is often argued that the imposition of such a tax is a difficult proposition since the volumes traded are too high. Yet if modern technology can enable large-scale financial transactions within and across borders, why can’t it be used to collect taxes?

Critics also argue it is almost impossible to get all the countries to agree on a common global tax. This is where leadership comes in. G20 member-countries could impose a FTT unilaterally or collectively. An agreement among the leading financial centres could also contain the threat of relocation of financial activities to other places.

The issues raised by the FTT are more political than technical. Its adoption requires strong political will, particularly among the G20 member-countries. Recent experience (including cooperation on money laundering from drug trafficking) shows that international cooperation among countries is possible if there is a political will. A similar cooperative initiative is required to address implementation issues related to FTT.

Another common criticism of FTT is related to evasion. All taxes are open to evasion but this is not a good reason to not have them. Concerted efforts should be made to check loopholes. No policy measure can be foolproof.

No one argues that a global financial transaction tax would resolve all the problems related to global financial markets. No single policy instrument alone can fix global finance. But an FTT could serve as a first step towards building international cooperation on global financial reforms. If used in conjunction with other policy instruments, an FTT offers an attractive mechanism to reform the inherently unstable global financial markets.

Kavaljit Singh is the Director of Madhyam, a policy research institute based in New Delhi.

Categories: Forum

Seoul searching for a China–Japan diplomatic balance

East Asia Forum - Fri, 12/12/2014 - 17:10

Author: Sarah Teo, RSIS

Are South Korea’s relations with China and Japan warming?

During the ASEAN Plus Three Summit in Myanmar in November, South Korea’s President Park Geun-hye proposed a trilateral summit with China and Japan. While this might not come as a huge surprise — given that recent months have seen several high-level exchanges between Japan and South Korea — Park had steadfastly declined to meet with Japanese prime minister Shinzo Abe since both leaders took office. The annual China–Japan­–South Korea trilateral summit was last held in 2012, as relations among the three countries deteriorated.

Issues clouding relations among the three Northeast Asian countries include maritime territorial disputes — China and Japan dispute the sovereignty of the Diaoyu/Senkaku Islands, while Japan and South Korea dispute the sovereignty of the Dokdo/Takeshima Islands — and historical legacies arising from World War II. In particular, South Korea and China want Japanese leaders to show remorse over the ‘comfort women’ issue and to stop visiting the Yasukuni Shrine, which is viewed as a reminder of Japan’s past militarism. Given that none of the three countries have changed their positions on these issues, why is Park now willing to meet with Abe within the framework of the trilateral summit?

Proverbially referred to as a ‘shrimp among whales’, South Korea is vulnerable to fluctuations in major power dynamics. In fact, the Korean peninsula is where the interests of global and regional powers — the United States, China, Japan and Russia — intersect. Yet, being a relatively weaker power, South Korea is unable to unilaterally influence global and regional agendas.

To secure its interests, South Korea has turned to middle power diplomacy, which is typically characterised by a commitment to multilateralism, conflict mediation and international activism. Being less materially powerful, middle powers rely on soft power and network building to carve out a significant role for themselves in world affairs. Park’s proposal is thus likely driven by one concern, which is to avoid diplomatic isolation. This is a looming possibility as other bilateral relations in Northeast Asia seem to be on the mend.

Three days before Park’s proposal of a three-way summit, Abe and China’s President Xi Jinping held a 25-minute meeting on the sidelines of the APEC summit in November. The Abe–Xi meeting followed an agreement to resume political, security and diplomatic dialogue. Sino–Japanese relations have spiralled downwards since the collision between a Chinese fishing trawler and two Japanese Coast Guard patrol boats in September 2010. Japan’s nationalisation of three of the disputed Senkaku/Diaoyu Islands in 2012 worsened already tenuous bilateral ties. Xi and Abe had not held a meeting since they each took office in 2012.

While the Xi-Abe meeting at the APEC summit does not indicate a resolution of the underlying issues plaguing Sino-Japanese ties, it is nevertheless a symbolic achievement. Both sides have reiterated the importance of the bilateral relationship, and agreed to establish a maritime crisis management mechanism. Should relations between the two Northeast Asian countries improve, South Korea, as the non-major power, could be relegated to the back seat in regional dynamics.

Another Northeast Asian bilateral relationship that has shown signs of thawing is that between Japan and North Korea. Anti-Japanese sentiment in North Korea stems from the former’s past colonial rule over the Korean peninsula. In Japan, hostility toward North Korea arises from the latter’s abduction of Japanese citizens in the 1970s and 1980s, as well as the nuclear and missile threat posed by the secretive regime.

This year, however, Tokyo and Pyongyang have resumed talks on the abduction issue, which had been stalled for a decade. No significant breakthrough has been made so far, but Japan has lifted some economic sanctions on Pyongyang and dangled the promise of humanitarian aid. While still very limited in nature, this development is significant because it suggests that a united US–Japan–South Korea strategy to deal with North Korea could potentially be undermined and South Korea’s interests on the issue sidelined.

Admittedly, recent developments in Sino–Japan and Japan–North Korean relations might not bear fruit. After all, tensions among these countries are longstanding and arise from deep-seated historical issues that seem unlikely to be resolved anytime soon. Yet, considering the possibility of improving Sino–Japanese relations on the one hand and thawing Japan-North Korean relations on the other, South Korea could increasingly find itself diplomatically isolated from its neighbours. Park’s timely proposal of resuming the trilateral summit, therefore, could be a step to prevent that scenario from coming to pass.

With the Trilateral Cooperation Secretariat based in Seoul and South Korea as the current chair of the trilateral summit, Park’s proposal reminds her neighbours that South Korea could assume an important role in Northeast Asia even if it is a non-major power. At the same time, the resumption of the trilateral summit would contribute to the realisation of Park’s Northeast Asia Peace and Cooperation Initiative (NAPCI), which calls for establishing regional peace and stability through multilateral cooperation and trust.

South Korea has since the late 1990s identified itself as a middle power. In the current climate, Seoul-led progress on the trilateral summit and the NAPCI would help to further cement South Korea’s status as a middle power in regional affairs.

Sarah Teo is an Associate Research Fellow with the Multilateralism and Regionalism Programme, S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University.

Categories: Forum

Will China accept international law in the South China Sea?

East Asia Forum - Fri, 12/12/2014 - 04:00

Author: Donald R. Rothwell, ANU

The ongoing disputes between the Philippines and China in the South China Sea are about to reach a critical point. In January 2013 the Philippines activated procedures under Article 287 and Annex VII of the 1982 UN Convention on the Law of the Sea (UNCLOS) over a dispute about the validity of China’s ‘nine-dash line’ in the South China Sea. The Philippines contests the validity of this line and any attempts by China to assert sovereignty or sovereign rights over islands and other maritime features found within this area.

But will China accept the Annex VII Arbitral Tribunal’s jurisdiction to hear and determine the Philippines’ claim?

In 2006 China made a Declaration under Article 298 of UNCLOS indicating that it did not accept certain compulsory dispute resolution procedures under Part XV of the convention, including disputes with respect to ‘historic bays or titles’. This raises issues as to whether elements of China’s disputes with the Philippines in the South China Sea would fall within this exception. It is currently unclear precisely what the historic titles that China asserts in the South China Sea are.

On 19 February 2013 China also indicated that it would not participate in the Annex VII Arbitral Tribunal proceedings. China further reiterated its position on 1 August 2013 when it submitted a note verbale to the Permanent Court of Arbitration at The Hague, which is the registry for the proceedings, indicating that ‘it does not accept the arbitration initiated by the Philippines’ and that it will not be participating in the proceedings.

The Philippines filed its written pleadings via a memorial on 30 March 2014. On 3 June 2014 the Arbitral Tribunal fixed 15 December 2014 as the date for China to submit its counter-memorial in response to the Philippines’ memorial. To date, as China has formally indicated that it will not participate in the proceedings, all current indicators are that China will not submit its counter-memorial on 15 December.

Still, Annex VII of UNCLOS contains procedures whereby if one of the parties chooses to not participate in the proceedings, an Arbitral Tribunal can be constituted and hear the application even in the case of a default appearance. In that scenario, the Tribunal would need to determine that it possesses jurisdiction over the dispute and that the Philippines claim is ‘well founded’ in both fact and law.

Yet, while 15 December 2014 will be a critical date in the proceedings, it does not represent a ‘last chance’ for China to engage in the proceedings. Additional procedures will take place. Given the issues raised by the Philippines application, China’s Article 298 Declaration and the real potential of China’s default of appearance, the Tribunal may request that the Philippines make additional submissions on matters that go to jurisdiction. The Tribunal may also seek further written clarification from the Philippines and request additional submissions with respect to matters arising from its 30 March Memorial.

These additional procedures may take some time and oral proceedings would certainly not occur until mid 2015. During this time China would always have the option of agreeing to participate in the proceedings. Even in the case that China did not make an appearance, consistent with Article 9 of Annex VII of UNCLOS, the Tribunal will need to rule that the claim is within its jurisdiction and well founded in ‘fact and law’. If the Tribunal did so rule, the Philippine’s claim could fall at that hurdle and the proceedings would be brought to an end.

China’s President Xi Jinping has recently called for greater emphasis on cooperation and diplomacy in China’s foreign policy. This position aligns with a more moderate position on China–Philippines bilateral relations advanced during the November APEC meeting in Beijing. If the Philippines and China remain unable to settle their South China Sea disputes in the short term, there is every likelihood that the Philippines will keep the Arbitration on track.

This will in turn throw the spotlight upon China. Is it prepared to engage in formal dispute resolution processes? Acceptance by China of the Annex VII UNCLOS arbitration process will result in a loss of control as the dispute is handed over to third parties and, as with all forms of international litigation, there is the risk of a Chinese loss.

On the other hand, by continually refusing to engage in the process, China runs the risk of appearing unwilling to be part of the global oceans order. China has been placing increasing significance on the global order of the oceans, including navigational freedoms. China also actively negotiated the global order of oceans during the 1970s and Beijing accepted when it became an original party to UNCLOS in 1996. Beijing will need to carefully assess how it ultimately deals with its South China Sea dispute with the Philippines and what the broader implications of its decision will be.

Donald R. Rothwell is Professor of International Law and Deputy Dean at the ANU College of Law, the Australian National University.

Categories: Forum

Will Pope Francis affect the position of Catholics in China?

East Asia Forum - Thu, 12/11/2014 - 16:00

Author: Paul Farrelly, ANU

Reflecting on a letter he wrote to Xi Jinping on his election to the papacy, Pope Francis said of China ‘the relationships are there. It’s a big country that I love deeply’. Since his papacy began, Pope Francis has made headlines for shepherding the Catholic Church along a relatively more liberal path. Does this mean that reconciliation with the Chinese Communist Party (CCP) might be possible?

While the CCP was established in 1921 (and came to power in 1949), the Catholic Church has maintained a presence in China for far longer. Nestorian Catholics were around in the eighth century and Catholic missions were established in the sixteenth century. The history of Catholicism in China offers important perspectives on the church as a global organisation and the religious landscape in China.

China is the one country where the Vatican does not influence the training and selection of clergy. The Vatican formalised reciprocal relations with the government of China in 1946, three years after a Chinese legation was established at the Holy See.

But the tumult of the Chinese Civil War and the rise to power of the CCP had lasting repercussions for the church.

Between January 1951 and May 1954, 3038 Catholic missionaries left China. Many went to Taiwan, the former Japanese colony where the Kuomintang (Chinese Nationalist Party) was attempting to assert itself domestically and internationally as the legitimate government of ‘China’. Taiwan maintained ties with the Vatican. Subsequently, there was spectacular growth in the number of Catholics in Taiwan, rising from 8000 in 1945 to over 181,000 in 1960. Catholic social services, such as healthcare and education, are now features of society in Taiwan.

In July 1957 the CCP, an officially secular and atheist organisation, established its own Catholic church — the Chinese Patriotic Catholic Association. This organisation maintains authority over the church in China.

Even with the CCP’s endless efforts to control religion in China, those who want to practice Catholicism (or any other religion for that matter) are still able to do so. Catholic house churches exist, allowing Catholics to discretely worship outside of the CCP’s direct sphere of influence. These clandestine practices make accurately counting the number of Catholics difficult. There could be as many as 12 million Catholics in China, although estimates vary.

Despite Pope Francis’ friendly overtures to Xi, reconciliation is nothing more than a pipedream. Xi is exercising authority in a way his predecessors had not done for some time. The ongoing ‘yellow-umbrella’ occupy movement in Hong Kong is evidence of how one part of China is reacting to the political realities of his rule.

Among the voices advocating greater autonomy for the citizens of Hong Kong is the former head of the Catholic Church there, Cardinal Joseph Zen. In contrast to the official Church, which has urged restraint, Cardinal Zen framed the quest for democracy as ‘a question of the whole culture, the whole way of living, in this our city’. Such a forceful repudiation of state authority would upset the CCP, which does not have a strong record of engaging with dissenting views.

For all the social services that the Catholic Church could bring to China, it is difficult to imagine the CCP tolerating an organisation that potentially harbours such outspoken individuals. Nor would it want to see the number of Catholics increase, as happened in Taiwan. That said, Catholicism will surely survive in China in one form or another.

The Catholic Church has a history far longer than that of the CCP and a much more extensive global reach. Just as Xi is acutely aware of the power of history in helping to legitimise the CCP, he must also be aware of the Catholic Church’s lengthy past. The church may not be able to enter China officially under Xi, or even a later CCP leader, but it likely will again at some stage in the future.

Paul Farrelly is a PhD candidate at the Australian Centre on China in the World, the Australian National University.

Categories: Forum

An election manifesto for the status quo on Japanese agriculture

East Asia Forum - Thu, 12/11/2014 - 04:00

Author: Aurelia George Mulgan, UNSW

Only one party contesting this week’s Japanese election is advocating agricultural reform and it is not the LDP.

The party in question is the Japan Innovation Party (JIP). Its manifesto contains a series of measures that amount to a textbook prescription for agricultural reform. These include abolishing rice acreage reduction, limiting the payment of direct income subsidies to ‘business farmers’ (shugyō nōka), carrying out fundamental reforms to the agricultural cooperatives (JA) along the lines of the recommendations of the government’s Regulatory Reform Council, amending the Agricultural Land Law to permit joint-stock companies to own farmland and reforming the agricultural committee system to prevent abuse of the farmland zoning system. More broadly, JIP advocates proactively engaging in economic partnerships such as the TPP, RCEP and the Japan–China–South Korea FTA.

Of course, JIP will not win government. The LDP is set to return to office. The only dispute is over the size of its majority.

On agriculture, the LDP’s manifesto repeats the customary platitudes about ‘establishing strong agricultural, forestry and fisheries industries’ and ‘improving the food self-sufficiency rate’. The bulk of its manifesto is given over to restating existing agricultural policies, particularly the goals incorporated into the Action Plan for the Revival of the Food, Agriculture, Forestry and Fishery Industries of December 2013, which fell well short of what is needed for structural reform of the farm industry. They include long-term goals such as doubling agricultural, forestry, fisheries and food exports by 2020 (from ¥550 billion [US$4.6 billion] to ¥1 trillion [US$8.3 billion]). But given the likely term of office of a post-election Abe administration, such goals are meaningless.

The manifesto also contains promises designed to attract farmers’ votes because they will impact directly on farm incomes, such as ‘implementing thorough measures in response to the drop in the rice price’, ‘considering the introduction of an income insurance system as a safety net against falls in income caused by declining prices’ and ‘enhancing measures in relation to direct payment systems for hilly and mountainous areas’. This is pork-barrelling, nothing more.

On agricultural reform issues more recently tackled by the Abe administration, the language of the manifesto is cautious and measured. On JA reform, for example, the manifesto states that ‘we will deepen discussion based on “Concerning the Promotion of Reforms relating to the JA, Agricultural Committees etc”, which the ruling parties put together in June this year, and steadily promote reforms’. There is no reference to implementing the recommendations of the Regulatory Reform Council, which targeted JA for a radical shake-up.

Despite Abe’s recent assurances for an early conclusion of the TPP, the manifesto reiterates long-standing LDP policy on preferential trade agreements, namely, that it will ‘protect what we need to protect and attack where we need to attack’. The manifesto pledges to abide by resolutions on the TPP negotiations adopted by the LDP and the Diet. These demand that rice, wheat, beef and pork, dairy products and sugar be treated as exceptions to tariff abolition and that the government be prepared to withdraw from the TPP negotiations if that cannot be realised.

When campaigning in Hokkaido, Abe made a personal commitment not to negotiate the TPP agreement in a way that would hurt farmers’ interests. It has been estimated that Hokkaido will suffer more than any other Japanese prefecture from Japan’s signing on to the TPP — particularly its livestock, dairy and sugar industries.

The disconnect between Abe and his own party’s manifesto reveals, once again, the dual structure of Japanese policymaking, encompassing party and government.

Under this system, policy initiated by the government (primarily Abe and his office, the Kantei, backed by government-appointed committees) is modified by ruling party actors, primarily LDP policy committee executives, supported by ordinary backbenchers who lend their weight of numbers and who also mobilise in informal intra-party lobby groups. This structure is particularly salient in the case of reforms impacting on strongly entrenched vested interests, such as agriculture.

Agricultural reforms under the Abe administration are very much seen as led by the Kantei rather than the LDP. The party–government divide is as strong as ever in this area of policymaking. The results of the election might influence the balance of power between the two, which is essentially politically rather than institutionally determined. If the Abe cabinet’s power is diminished by a poor showing in the polls, it will reduce the effectiveness of Kantei-led policymaking against the LDP.

Alternatively, if the LDP wins a resounding victory with large numbers of regional MPs recommended by JA’s political groups winning seats after signing agreements not to support the TPP unless the five ‘sensitive’ products are protected, and to align themselves with the JA group’s self-reform plan, this will just add more to the party’s weight vis-a-vis the Kantei.

Abe’s current Agriculture Minister Koya Nishikawa, who suppressed opposition from within the LDP to Japan’s participation in the TPP negotiations, is on shaky electoral ground in his constituency despite being recommended by the JA’s national political organisation, Zenkoku Noseiren. In recent days, he has distanced himself from the Kantei on the issue of JA reform.

Another variable in the equation is the Ministry of Agriculture, Forestry and Fisheries (MAFF) itself. The 29 November issue of the weekly magazine Shūkan Daiyamondo reported a division between reformists, who are regarded as following the Abe–Kantei line, and the moderates, who represent the conservative mainstream of the ministry and who have close relations with industry organisations, such as JA. Which group will gain the ascendancy will be essentially determined by who is chosen as the next MAFF administrative vice-minister, and whether he represents the reformist or moderate faction within the ministry.

In order to cut through on agricultural reform, Abe needs to bring under his control both the party and the bureaucracy.

Aurelia George Mulgan is Professor at the University of New South Wales, Canberra.

Categories: Forum

China’s digital dilemma

East Asia Forum - Wed, 12/10/2014 - 16:00

Author: Greg Austin, EastWest Institute

In February 2014, Chinese President Xi Jinping was appointed Chair of the Central Cybersecurity and Informatization Leading Group, an agency which coordinates China’s cybersecurity and ‘informatisation’ policies. The move reflected deep dissatisfaction within the leadership of the pace of innovation in the country. Xi’s appointment reflects China’s willingness to change this — but only to an extent.

‘Informatisation’ is not a common term in English, but as used in China it means the application of advanced information and communications technology to politics, the economy and in the military. Within the economy, it extends well beyond IT products to include the application of information systems in sectors as diverse as health, agriculture, environment and taxation.

China has not lacked leadership in this area of policy. In 1983, Deng Xiaoping set a target for growth of the electronics industry that was double his other wildly ambitious target: quadrupling national GDP by 2000. When Jiang Zemin became General Secretary of the CCP in 1989, he brought with him the experience and passion of his role as the minister of the electronics industry under Deng in 1983. In 1998, as part of a massive reorganisation of government, the incoming premier, Zhu Rongji, set up a new super ministry of Industry and Information Technology. In 2001, Zhu replaced a vice minister as Chair of the Leading Group. Zhu’s successor, Wen Jiabao, in the role as Chair, was an ardent advocate of the informatisation of China, seeing it as a ‘mega-trend for development in world affairs’.

According to the World Economic Forum’s (WEF) 2014 report on the global information technology scene, China is ahead of many advanced economies in terms of its government’s commitment to transformation through informatisation. It ranked 24th in this measure, compared with the United States at 39th, Japan at 28th and South Korea at 26th.

But performance against the ‘transformation intent’ measure is not matched by China’s performance overall in terms of achieving digital competitiveness. In 2014, China was ranked 62nd in the WEF’s Network Readiness Index, having slipped over four years from 36th in the 2011 rankings. China has its own indexes which also give it a relatively low international ranking in the field of informatisation.

It seems there is a conflict between the leaders’ rhetorical commitment and the realities of China’s economy and society. There are many possible explanations for the gulf between ambition and outcomes. In my new book, Cyber Policy in China, I attribute the shortcomings to the divergence between the underlying leadership values and those needed for a country to become an advanced information society.

On the positive side, China’s leaders have made amazing progress, evidenced in their commitment to intellectual property rights reform, promoting the role of venture capital, and recognising the central role of the private sector and university-based research as the main drivers of technological innovation.

But the negatives have been more powerful. As important as universities are to innovation, the CCP has not been prepared to surrender or even lighten the heavy hand of its control over them. This inhibits an environment which would promote a flowering of innovation on the required scale.

One fundamental part of that environment is freedom of information. At its most basic level, an advanced information society depends on the free flow of information and scientific data. This is an inherent characteristic independent of the political system. Yet China’s leaders of the last decade have been unable or unwilling to convert earlier interest in freedom of information into a reality. In 1984, Deng Xiaoping observed that China needed to develop its information resources because its government and scientists did not even have basic statistical data about their own country.

While much has changed in this respect, most government information in China on some of the most important social, economic, environmental and scientific issues remains a state secret. This is not about the structure of the political system. This is about a defining reality of the digital revolution: it depends inherently on free flow of factual information. China must reach more aggressively for that.

Greg Austin is Professorial Fellow at the EastWest Institute and a Visiting Professor at UNSW (ADFA).


Categories: Forum

Abe must raise taxes to save Abenomics

East Asia Forum - Wed, 12/10/2014 - 04:00

Author: Yukinobu Kitamura, Hitotsubashi University

Japan’s Prime Minister Shinzo Abe dissolved the lower house of the Diet on 21 November and called a snap general election on 14 December. At the same time, Abe announced that he would postpone the second hike of the consumption tax rate from 1 October 2015 to 1 April 2017.

From a political perspective, most voters understand that a rapidly ageing population needs steady tax revenues from a broad tax base to finance its ever-expanding social security spending. This is why political parties that opposed the increase in the consumption tax rate lost their seats. Voters saw these parties as irresponsible.

Abe repeatedly praises himself on how well his economic strategy (popularly dubbed ‘Abenomics’) has worked. But Abe has been lucky: the business cycle began to turn just as he was elected, so the — pretty good — economic performance under his administration cannot all be attributed to Abenomics.

Abe’s decision to postpone the second hike of the consumption tax rate was based mainly on the latest estimates of quarterly annualised GDP growth in the second quarter, which has been estimated at -7.1 per cent. This figure shocked many market economists and politicians.

But this figure is misleading. Consumers were aware of the tax hike, so there was a rush to buy items, especially consumer durables and housing purchases, before the hike in April 2014. It is not surprising then that consumption fell in the second quarter because consumers had bought many items in the previous quarter to avoid paying more tax. The important figure is net domestic demand of the tax increase. One way of doing this is to compare output in the second quarter of this year to output in the second quarter of last year. This shows growth of -0.1 per cent per annum. The same measure for the first quarter of 2014 was 3 per cent. Overall, there we cannot identify any strong sign of structural change in consumer behaviour apart from demand smoothing and rapid ageing continuing.

The consumption tax hike should go ahead as planned. The Abe government has a double mandate to boost economic growth and escape the deflationary environment of the past few decades, as well as to recover a sound fiscal position. The second mandate might be politically unpopular, but it must not be ignored or receive a lower priority than the first.

It is also better to implement the tax reform during the early expansionary phase of Japan’s current business cycle, if it has not gone through its peak already. Postponing the consumption tax rate hike until later in the cycle could create a higher risk of recession.

In addition, a large part of the extra revenue from a consumption tax hike would be redistributed to households, mainly through the social security system. A consumption tax hike therefore doesn’t necessarily reduce household’s disposable income. Of course, some may argue that the social security system is too generous to the elderly and too mean to the young. But this is a problem of the transfer system, not the consumption tax per se.

What should Abe do next? For better or worse, Abenomics is a direct successor to old-fashioned Keynesian fiscal and monetary policy that prevailed in the high-growth era in the 1960s. Implementation of the third arrow — radical structural reforms — is eagerly awaited.

To stoke private sector growth, the Abe government must set monetary and fiscal policies consistent with the structural reform strategy. When the economy nears full employment, further government stimulus crowds out private sector activity. In this case, the first and second arrows of Abenomics need to give way to the third. Put bluntly, further expansionary monetary and fiscal policy will harm economic growth in the private sector as the economy reaches full employment.

Yukinobu Kitamura is a Professor at the Institute of Economic Research, Hitotsubashi University.

Categories: Forum

Time to rethink economic policies in Indonesia

East Asia Forum - Tue, 12/09/2014 - 16:17

Author: Ross McLeod, ANU

Economic performance in post-Suharto Indonesia has been inferior to that achieved during the previous three decades, with economic growth slower and income inequality increasing. With the recent election of a new president, now is a good time to focus on improving the quality of economic policymaking.

To begin, how should Indonesia make use of its rich natural resources? Broadly speaking, these can be used either to finance consumption or to create productive assets that will generate future income. Former president Suharto chose the latter option, using resource revenues to build roads, schools, markets, health facilities, irrigation networks and drinking water supply. Indonesia benefited considerably from such investments in terms of higher incomes and reduced poverty.

Later presidents have favoured the option of selling the family silver. All of the Susilo Bambang Yudhoyono (SBY) government’s resource revenue was frittered away as unnecessary subsidies for energy consumption, reducing Indonesia’s growth potential and contributing to increases in income inequality — since these subsidies flowed overwhelmingly to the rich and middle class. Incoming president Joko Widodo has already earned plaudits for reducing the fuel subsidy, but SBY did exactly the same thing soon after coming to office. Neither removed the subsidy altogether, nor took the opportunity to link domestic energy prices to the world oil price. If the latter now increases as it did under SBY, the subsidy cost will increase commensurately, and Indonesia will be back at square one.

Another question facing the administration is: what is the appropriate policy for the manufacturing sector? The share of manufacturing in total output peaked in about 2001 and has declined subsequently, causing considerable angst. Yet this trend reflects Indonesia’s past success in raising average incomes. As populations become wealthier they demand more services (education, health care, banking, entertainment, and the like) relative to manufactured goods. Most services are not imported so more must be produced, which means withdrawing labour and capital from manufacturing. Globally, manufacturing typically peaks at 25–30 per cent of total output, declining thereafter to 10–15 per cent or less. Even in the manufacturing powerhouse of China manufacturing has been declining since the mid-1990s.

Attempting to reverse this pattern is not in Indonesia’s best interests. One such policy is to mandate the domestic processing of metal ores rather than exporting them. The rationale for this is that Indonesia supposedly has been missing out on the potential for ‘value adding’: that is, converting metal ore to the much more valuable metal prior to export.

It is always possible to increase value added in any activity by making further processing artificially more profitable — in this case by removing the option of exporting unprocessed ore. The effect is to shift labour and capital away from the rest of the economy into ore refining, so the increased value added (that is, earnings of labour and capital) in manufacturing is offset by reduced value added elsewhere. Domestic processing in Indonesia is more costly than processing in other countries, so this policy actually reduces the net gain to Indonesia from the exploitation of its natural resources.

Finally there is the question of spending on infrastructure. SBY put considerable emphasis on public private partnerships (PPPs) at the beginning of his term in office, arguing that the government itself could not afford the level of spending required. But two international infrastructure summits intended to secure private sector participation turned out to be wishful thinking.

The prerequisite for private sector involvement is simply that projected returns are commensurate with the risks involved. Evidently the combination of return and risk in Indonesia is considered unacceptable. This is explained by the government’s insistence on controlling infrastructure user charges, and the fear on the part of potential partners and their bankers that regulated charges will be subject to the vagaries of politics. If this fear can be overcome, the private sector will quickly come on board.

The SBY administration often excused its poor performance in relation to building new infrastructure by emphasising the difficulty of taking over the land needed for this purpose, but this difficulty is self-imposed. The government has an unambiguous constitutional power to compulsorily acquire land that is needed in the best interests of the public, subject to fair compensation for the existing owners. Successive governments have adopted a policy where the amount of compensation has to be accepted by the owners before the land changes hands, but there is no reason why this should be so. Indeed, common sense demands that the land should be acquired immediately the need for it is demonstrated, with compensation being paid at that time. If landowners dispute that the compensation is fair, they should have the right to have the amount reviewed by the courts, but this process need not delay government acquisition of the land.

Ross McLeod is Adjunct Associate Professor at the Indonesia Project, The Australian National University. He was Editor of the Bulletin of Indonesian Economic Studies from 1998–2011. This is an edited version of his presentation at the Indonesia Study Group seminar on 26 November 2014.

Categories: Forum
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